Why is India's wealth inequality growing so rapidly?

High-rise residential towers under construction are pictured behind an old residential building in central Mumbai [Vivek Prakash/Reuters]

An Oxfam report released on the eve of the World Economic Forum at Davos underscores the dramatic increase in wealth inequality in India in recent years. In 2017 alone, the top 1 percent of the population owned 73 percent of the addition to wealth that occurred. A year ago, the top 1 percent owned 58 percent of the stock of wealth. Thus its share, already phenomenal, is still increasing.

Of course, estimates of wealth, and hence its distribution, are highly problematic, but the dramatic growth of economic inequality in India is confirmed by authors using other data sources. French economists Thomas Piketty and Lucas Chancel (pdf) for instance have argued, using tax data, that income inequality in India today is higher than any time since 1922 when income tax was first introduced. Hence, Oxfam's estimates have to be taken seriously.

And even if one quibbles about the exact extent of inequality, its direction and rapidity of movement are unmistakable.

Commentators on the Oxfam report have tended to infer from it that the rich have disproportionately cornered the "benefits of liberalisation". This is a rather incorrect reading of what happened.

"Liberalisation" itself is responsible for the growth in inequality, as is clear from the fact that it is not just India, but the world as a whole, that is witnessing growing wealth inequality.

The share of the world's wealth that the top 1 percent held as a whole was 50 percent (pdf) before 2017 (compared to 58 percent in India); the share they had in adding to world wealth in 2017 was 82 percent (compared to 73 percent in India).

Growing wealth inequality is an inherent feature of neo-liberal capitalism.

India-specific factors, in short, have operated on a general trend that is common for all, and this trend has to do with the pursuit of neo-liberal economic policies. Growing wealth inequality is an inherent feature of neo-liberal capitalism.

Neo-liberal policies aggravate wealth inequality in several ways. First, they widen income inequality. Since the ratio of income that is "saved" (for adding to wealth) is higher for the upper-income groups, a rise in income inequality raises both the overall savings ratio in the economy and also the degree of concentration of wealth in the hands of the rich.

Income inequality, in turn, grows for a structural reason. Neo-liberal policies entail a withdrawal of state support from peasant agriculture and petty production in general. This undermines those sectors, forcing peasants to migrate to the cities in search of jobs. At the same time, these policies remove all restrictions on the rate of technological-cum-structural change, so labour productivity rises rapidly making employment growth insufficient to absorb even the natural growth of the workforce, let alone the distressed peasant migrants.

This creates slack in the labour market, which keeps the wage-rate low even as labour productivity increases. Since the ratio of wage-rate to labour productivity is nothing else but the share of wages, this share decreases, and the share of those who live on the surplus (i.e. non-wage income),typically the rich and the professional classes, increases. A rise in income, and hence wealth inequality is thus embedded in the structure of neo-liberal capitalism.

Secondly, quite apart from its effect on the labour market, the out-migration of peasants and petty producers is typically associated with a loss of assets by them. For example, when leaving for the city, labour migrants would abandon their houses or their land or be forced to sell them at low prices. What is more, sometimes their assets are simply expropriated to facilitate industrial or "infrastructure" projects (roads, dams, factories, etc.) which invariably have a real estate component to them. This contributes directly to greater concentration of wealth.

Thirdly, the privatisation of essential services like education and healthcare makes them effectively more expensive for the lower income groups. Hence they have to spend more from their already meagre income on these services and are unable to save and add to their wealth to the same extent as before. This also contributes to growing wealth inequality.

Fourthly, a neo-liberal regime typically entails handing out tax concessions and tax rebates to big corporations for ushering in "faster growth". The obverse of this is the constraint on public spending on education and health and withdrawal of state support to peasant agriculture that was noted above. Such tax concessions to corporations, not to mention tax evasion and non-repayment of loans to public sector banks, promote wealth inequality.

Finally the asset market bubbles, which characterise neo-liberal regimes and contribute to their dynamism, increase the value of wealth at the top and boost wealth concentration. A stock-market surge for instance can create billionaires overnight. Some have argued that since such bubble-based wealth, which will disappear when the bubble bursts, exaggerates wealth concentration, the available estimates of wealth inequality need not cause concern.

Governments, however, not only try to prevent such bursts but take steps to ensure that the capital gains made through such bubbles do not just remain fictitious but are converted into real assets. They do so by incessantly throwing new assets on the market, through the privatisation of natural resources like water and air, and the sale of public sector assets like "spectrum". The estimated wealth inequality, therefore, is not just fictitious but is quite real.

Each of these mechanisms has operated in India, which has witnessed an agrarian crisis, a growing privatisation of essential services, a prolonged stock market boom and rampant tax concessions to the corporate rich. Growth in wealth inequality in such circumstances is inevitable; the other side of this coin is mass peasant suicides, growing hunger, and burgeoning unemployment. Governments pursuing neo-liberalism cannot even use taxes to counter growing wealth inequality, apprehensive that the country would lose its appeal as an investment destination; they are in a bind within this regime.

Such inequality, however, threatens not only Indian democracy but the implicit social contract, enshrined in its constitution, upon which modern India is founded.

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial stance.